Deadlock Mechanism Clause Template (Copy, Paste & Adapt)

Deadlock Mechanism Clause (Sample):

If a deadlock arises between shareholders, directors, or partners in this partnership, startup, or limited liability company—meaning the parties cannot agree on a key decision after [two] board or shareholder meetings—the following process applies:

1. The parties must attempt mediation for at least [30] days.
2. If unresolved, either party may trigger a buy-sell mechanism (e.g., Russian Roulette or Texas Shootout), where one party offers to buy the other’s shares at a set price per share. The other party must either accept the offer or buy the first party’s shares at the same price.
3. If neither party acts, the company may be wound up or another agreed process followed

What is a Deadlock Mechanism Clause?

A deadlock mechanism clause provides a structured way to resolve disputes when directors, partners, or shareholders in a partnership, startup, or limited liability company cannot agree on key decisions after incorporation. It prevents paralysis and costly litigation by setting out clear steps for mediation, buyouts, or winding up.

Who Needs It and Why?

• Best for: 50/50 partnerships, startups with equal co-founders, and limited companies with balanced director or shareholder control.

• Key risk if missing: The company can become paralysed, unable to make decisions or move forward, often leading to expensive court action or forced winding up.

• Typical UK challenge: Without a deadlock clause, disputes can drag on for months or years, harming the business and relationships.

How It Works in Practice

Example:
Two directors each own 50% of a limited liability startup. They disagree on strategy and can’t break the tie. The deadlock clause triggers mediation, and if that fails, a Russian Roulette buyout—one director offers to buy the other out at £10 per share, and the other must either sell or buy at that price.

Common Pitfalls and Legal Nuances

• The clause must be in the shareholders’ agreement or articles of association to be enforceable for any partnership, startup, or limited company.

• The buy-sell mechanism can favour the party with more cash—consider safeguards or staged payments.

• Mediation should be a genuine attempt to resolve the issue before triggering drastic measures.

FAQ

1. Is a deadlock mechanism only for 50/50 companies?
No, it’s useful for any company, partnership, or startup where equal control or director disagreement is possible.

2. Can a deadlock clause force a sale or winding up?
Yes, if the process is triggered and followed as set out in the agreement.

3. Is mediation required before buyout?
It’s common and recommended, but you can tailor the process to your needs.

4. What’s the difference between Russian Roulette and Texas Shootout?
Both are buy-sell mechanisms; Russian Roulette lets one party set the price, Texas Shootout involves sealed bids.

5. Can the clause be challenged in court?
If the process is fair and clearly set out, courts usually uphold it, but unfair terms or lack of clarity can lead to disputes.

Summary / Action Steps

• Review your shareholders’ agreement and articles of association for a deadlock mechanism clause, especially if you’re a director, partner, or shareholder in a startup, partnership, or limited liability company.

• If missing, negotiate its inclusion before any disputes arise.

• Use the template above as a starting point, but adapt it to your company’s needs and structure.

Disclaimer: This content is for general information only and does not constitute legal, financial, or tax advice. Outcomes may vary depending on your individual circumstances.